By Martin Wolk Executive business editor
updated 12/9/2003 5:51:45 PM ET 2003-12-09T22:51:45

U.S. central bankers left short-term interest rates unchanged Tuesday at the lowest level in 45 years and reiterated their intention to keep rates low for a "considerable period" despite recent signs of strong economic growth.

At their last scheduled meeting of the year, Federal Reserve Chairman Alan Greenspan and his colleagues left the benchmark federal funds rate at 1 percent as expected, meaning consumers and businesses will continue to enjoy low rates on many types of loans.

The Fed surprised some on Wall Street by leaving in the reference to a “considerable period,” indicating central bankers are in no rush to begin raising rates even as the economy gains momentum after its long downturn. But in a hint at possible changes ahead, the Fed said policy-makers are no longer concerned about a potentially devastating downward spiral in prices, saying “the probability of an unwelcome fall in inflation has diminished in recent months.”

Central bankers also were more upbeat about the economy than they were after the last meeting of policy-makers six weeks ago. The Fed noted recent signs that output is “expanding briskly” and labor market conditions improving “modestly.”

Stock prices fell slightly and interest rates rose on the bond market as traders saw the Fed begin laying the groundwork for a possible series of rate hikes, which many analysts expect to begin in mid-2005.

The Fed is “moving towards a much more balanced assessment of risks, both on the inflation side and the growth side,” said Lynn Reaser. “The implied message as they move toward a more balanced view of risks is that this rate of policy accommodation cannot be sustained indefinitely.”

The Fed cut rates for a 13th straight time in June, capping a two-and-a-half year campaign to bring the sluggish economy out of the doldrums. With the tailwind generated by low interest rates, a sliding dollar and a massive federal tax cut, the economy roared to life in the third quarter, growing at an 8.2 percent pace, the fastest in nearly 20 years.

Consumers spending and business investment have remained strong in recent weeks, and the final piece of the puzzle has been dropping into place as the economy finally has begun adding jobs, although not nearly at the pace that would be expected two years after the end of a recession.

Last week’s employment report showing the economy added only 57,000 jobs fell short of expectations and may have contributed to the Fed’s decision to underscore its commitment to low interest rates, analysts said.

Full Fed statement
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.

The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly, and the labor market appears to be improving modestly. Increases in core consumer prices are muted and expected to remain low. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; and Robert T. Parry.

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